There were a couple of key takeaways for me from this book. Gawande reports on the research of the science of complexity. Professors Brenda Zimmerman of York University and Sholom Glouberman of the University of Toronto have developed a distinction between three types of problems in the world. The first type is simple – like following a recipe to bake a cake. You may have to learn some parts of it, but it should be repeatable if you follow the instructions. The second type is complicated – think of sending a rocket to the moon. In a complicated problem, you can usually break it down into many simple problems, but you will have multiple people or teams, multiple specialties and timing and communication become serious obstacles to be overcome. The third type is complex – the example given here is raising a child. Unlike sending a rocket to the moon, if you successfully raise a child, there is no guarantee that your second child will turn out the same. Experience is helpful, but by no means sufficient. It is possible to successfully raise a child (no matter how you define that), you just can’t predict how it will happen.

In each of these types of problems, a checklist can be helpful. In the simple case, a recipe is a simple checklist that ensures that all of the steps are completed in the correct order. In the complex case, a checklist can be used to schedule the work that needs to get done, coordinate the interactions between the different teams and even regulate the communication between teams that is required to iron out issues that arise during the project. Gawande spends some time in the book detailing a large building project and their use of checklists to ensure that all of the myriad details that must be accounted for during a skyscraper construction project are managed.

It is in the complicated cases that the uses of the checklist have really not been utilized. For many years, the complicated cases have seemed to be too random to be managed through checklists. In the surgery, complications are all too often a regular part of the job. This antibiotic doesn’t work for this patient. The patient suddenly develops an infection. The laboratory does not deliver the right type of sample collection device. But Gawande and a team at the World Health Organization worked on a trial project with 8 hospitals around the world to try checklists in the operating room. Their goal was not to address all of the potential complications. They created a list of 19 specific things to check before, during and after a surgery. Things like, did you check the patient’s name bracelet, did you give pre-surgery antibiotics, if there is a chance for blood loss, did you request blood supplies be available. In addition, the checklist required that the team all introduce themselves before surgery. This bit was introduced to help the surgical team function like a team, when the complications arose.

The results from the trial were unbelievable. Hospitals from the US, Canada, UK, Australia, India, the Phillipines, Jordan and Tanzania participated. Overall, the rate of major complications for surgical patients in all eight hospitals fell by 36% after the introduction of the checklist, while deaths fell 47%. Such a simple concept. But it forced everyone to concentrate on the issues that they had control over, while preparing them to work as a team on the unforeseen complications that inevitably arise.

Now, usually I write about entrepreneurship, so why is this so important?

Well, Dr. Gawande took his message of the value of checklists to experts in other industries to see if there was a correlation. One of the folks he talked to was Geoff Smart, who wrote a top selling book on hiring called Who: The A Method for Hiring. Smart did a project with Venture Capitalists where he evaluated the style that the VC used to make investment decisions. The VC’s that used a checklist approach had a 10% likelihood of replacing the senior management versus 50% for VC’s that didn’t use the checklist. They were also more financially successful. The checklist users had an 80% ROI versus 35% or less for the rest.

As you look to develop your businesses, it seems like a good idea to implement checklists throughout your businesses. Even though your outcomes may not result in life and death, like Dr. Gawande, the benefits of using checklists to cull out the simple and mundane errors and focus on the complicating factors will strengthen your business.

Ryan Avent today talks about a topic that I have wondered about for a while. In his piece, he talks about the funding for infrastructure, but it could just as easily be talking about improving our health care system. He rightly points out that the media (both left and right sides) don’t talk about this issue at all. Now, I don’t recommend that we scrap our entire defense network, but it certainly seems like this budgetary area is ripe for the picking.

On the Avent article, one commenter left the following, which made my day:

Maybe if we described that bridge collapsing in Minnesota as our infrastructure “suicide bombing” us, than we’d get that much money

Last week, I was so bold as to call out the entire airline industry. Not enough innovation, too much nickle and diming, poor customer service. You have heard it all before, but my mistake was to assume (you know how that ends) that the airline industry was acting as a unified block. In most cases, they are. If American raises prices, Continental and United follow along the next day. If United adds a new “cost option”, the rest act like sheep or more likely, lemmings to offer the new selection.

But then I read this story about three guys who came up with a new way to skip a lot of the nonsense that is associated with flying. This is an entrepreneurial story that makes my heart sing, because these three non-aviation experts were able to think outside the box and come up with an entirely new aviation model in SeaPort Airlines.

The idea of getting around the FAA’s rules about security screenings by using planes that are under the legally mandated size is genius. They have started small, flying between two heavily trafficked cities, Portland and Seattle in business turboprops outfitted for commuter use. They fly into in-city airports, saving commute times on both ends. There are 10 scheduled round trip flights each weekday, so customers have plenty of options. Recently they have added some additional destinations both in the Northwest and in MidSouth as part of the FAA’s Essential Air Service Program.

From this we can learn a couple of key lessons. The first is that the entrepreneurial spirit does not limit itself to technology companies. Second, even the most moribund industry with the tightest controls can be attacked by a nimble competitor who is focused on serving a niche. Don’t lo0k at the Facebooks and YouTubes of the world as the only example of exemplary entrepreneurship — that is the lottery, a one in several million chance. Rather, find a place where people are unhappy with their options and give them something better. Be the best in your niche and you will reap the rewards.

When I think of all of the businesses that I might want to be involved with, the airline industry is down near the bottom of my list. Massive government intervention, public ownership, reliance on a wildly fluctuating fuel cost, overcrowded marketplace, customer service nightmares, unionized unhappy employees throughout the organization. Wow! But it still amazes me that the executives in charge of the majors take their eye off the ball so often.

Doug Parker, president of US Airways, crowed that the carrier was making $400 million per year on ancillary fees. Never mind that the industry continues to lose money. Never mind that US Airways lost $100 million in a recent quarter and saw its revenue drop over 13%. United Airlines makes $14 per passenger in ancillary charges, but lost $382 million in Q1 2009.

Never mind that the average consumer is tired of being nickled and dimed – window seat, head set, cut in front of the line, extra 5 inches of legroom, snack, soda, more miles, checked bag, overweight bag, travel on a busy day, talk to a ticket agent, redeem a frequent flyer award – all of these cost extra on at least one major airline (excepting Southwest). The whole travel experience is now so convoluted that some people have decided that the hassle of air travel is just not worth it. I have had 4 opportunities this year to travel that in years past I would have chosen to fly. Not this year… my rule has become only fly if necessary.

From a customer service perspective it is a disaster. Every time you need to talk to the company, they want your credit card. Their eagle eyed bean counters (and remember that I usually love bean counters) are crowing about the new revenue, but aren’t looking at how many people have stopped flying. That seems to be to be a bigger issue.

I mentioned earlier that Southwest has not moved to a la carte pricing. They haven’t had a losing quarter this year. Maybe that should tell the bean counters something.

Even in areas outside of the airlines, we see the same “logic”. I tried to buy college football tickets online last week. The website gave me two options for delivery. Print them out at home for $6 or pick them up at Will Call for $3. In neither case, did the college incur any significant additional cost, but there was that ancillary charge. Guess what, I didn’t purchase the tickets over the internet. Oh well.

For those of you out there looking to break down your pricing to provide a more a la carte menu solution, I would recommend really investigating whether you will achieve the goals that you hoped by doing so. You may be much better off by playing the Southwest to the majors.

Your mother was probably fond of the saying “Absence makes the heart grow fonder”. Mine certainly was. She usually trotted it out when she wanted one of us to go on a trip where we would have to leave the current boyfriend or girlfriend home for a week or so.

I was reminded of this when I read the book Yes!: 50 Scientifically Proven Ways to Be Persuasive on vacation. In the book, the authors use scientific studies to validate ways that people can be persuaded to do something. Some of the ways involved differing methods of getting people to reuse hotel towels. But what prompted this post was the idea that scarcity of a product can increase its demand. Not absence, scarcity. The idea is that if there is a hope of getting a scarce product, then consumers will desire it more.

They used the case of the Oldsmobile. In 2004 GM discontinued the manufacture of the Oldsmobile line due to low sales. The ironic thing is that the sales of Oldsmobiles in 2003 were their highest ever. People were induced to buy because of the scarcity of the brand.

I am convinced that the popularity of the Wii gaming system from Nintendo was also a case of the scarcity inducing purchase envy. Nintendo released the Wii with only a few systems available. If you knew of someone who got one of the first ones, they raved about the user interface and the general fun factor of the games. This just stoked the purchasing flames, when people could not get one. Those folks staked out the Best Buys and the Costcos just waiting for the next shipment to arrive, so that they might get their hands on one of the 25 just arrived systems.

However, scarce does not mean late. Note that Boeing has upset more customers with a late delivery for their 787 Dreamliner than made potential clients excited. You have to make your dates.

Scarce also does not mean boring. Something that is scarce and boring does not make people excited. See any number of cell phones that are released for use on one cellular network and has me-too features. Who really cares?

And despite what my mom said, absence won’t really get you talked about. You need to have something there for people to get excited about and envision themselves owning. Nintendo and Oldsmobile (probably inadvertently) got the mixture right. This same story was critical in the Tickle Me Elmo, iPhone and Cabbage Patch Kids.

Find a way to make your product good and scarce. It has to be both. And you just might have the next remarkable product in the land.

One of our great legal minds lives right here in Chicago. I have read, listened to and appreciated Judge Richard Posner for a while now. But every so often, even the brightest of us can get a brain fart. Such was the case with this blog post by Judge Posner.

Judge Posner has advocated the outlawing of linking to and summarizing of newspaper articles in order to save the newspaper industry. But the whole purpose of the internet was to bring the world’s information to people in a usable fashion. Linking is key to that. I couldn’t even write this blog post with the information needed to provide the reader with context without linking. Rather than the newspapers figuring out how best to react to the new world of media, they are looking to find ways to make it illegal to compete with them.

The state of the traditional media in our world is deteriorating quickly. Publishing companies are in bankruptcy. Newspapers have stopped printing in Minneapolis, Seattle, Baltimore, Albuquerque and Cincinnati. The newspaper people are doing everything in their power to become more relevant to the masses, as are television news, cable and radio. But it is too late.

Too many people are getting their news from the internet. So, that is the problem. The difference is that the internet experience to getting news is two way and customized. There can be discussions (ok, a lot of flamewars too) on stories. Citizen journalists can add to the story by providing photographs or video. Through the use of Twitter and email, stories are told in a much more immediate fashion. Stories get traction because people link to them. That is the way of the internet. Links are king.

Following up on Judge Posner’s blog post, Connie Schultz of the Cleveland Plain Dealer talks about changing US Copyright Law to allow newspapers to own their content for 24 hours, during which time no one else could link to the story. She has a First Amendment attorney to back her up. If this isn’t a violation of the First Amendment, I am not sure what is.

Jeff Jarvis writes a blog post about it today. Check out the comments to see the variety of positions taken and how our view of the issue is enhanced, not by the self-serving traditional media company, but by the interaction with two way dialogue.

How many times have you made the statement to yourself (or to your significant other) “Man, they just don’t get it.”? Maybe it’s because I am getting older, but it seems like those “Get off my lawn!” moments are happening more and more frequently to me. Let me give you a couple of examples from this week.

I read an article from Slate today about the plight of airline pilots, written from the point of view of a airline pilot. In this rant, he blames the consumer for looking for $99 fares causing airline executives to: look for less experienced (cheaper) pilots, for diverting flights from big planes to commuter jets, for the decrease in pilot pay and even for the company not providing the pilots with free food.

We all know that the airline business is a tough one to be in. It has been estimated that the US airline industry in all of its years of operation has not posted a cumulative profit. Be that as it may, the pilots for a long time ruled the roost. Their unions have provided the most senior of these pilots with salaries well into the 6 digits. The author of the article talks about new pilots making “welfare wages”. In fact, first year pilots make in the low $30K range across many of the major carriers. Not big bucks, but it is based on a half time flying schedule. They are limited by Federal Law (FAR 121.481) to a maximum of 1000 hours flying time per year, which is considered half time in my book. Yes, they have to get to the job, but so do a lot of commuters. I don’t know about you, but $32K is not welfare wages. In fact, it is right at the median for wages across the whole US. The picture changes as the pilot gets more experience. With the larger carriers, within 3 years, the salary will double or almost triple. With the regional airlines, the initial salaries are lower and the rate of increase is also lower. The pilots’ union for these carriers have had less success in negotiating the higher salaries than their brethren at the majors.

The author claims that safety is compromised by hiring younger, less experienced pilots at the regional airlines. These pilots must meet the same qualifications, mandated by the FAA, as at the bigger carriers. His conclusion that the safety of passengers is threatened has not been verified by the actual events. Flying in a commercial jet (of any size) is safer than most other modes of transportation.

But the most laughable point was that despite flying a full day, the pilots were not given free food. Now, other than Google (and a few other non-traditional companies), where else do you, as an employee, expect to be fed while on the job? Heck, even at Burger King, employees are not given free food, only discounted meals. Get off my lawn!

Well, let’s see… I haven’t talked about health care in about 12 hours, so let’s hit that one as well…

The AMA, Big Insurance and Big Pharma are against any major reformation of health care in our country. And why not. They are all making a ton of money at our expense. I read an article by Abraham Verghese in the Wall Street Journal about the health care debacle from a doctor’s perspective. In his article, he decries preventive medicine and electronic medical records (EMR) as not helping to solve the problems of our age. In my opinion, both preventive medicine and EMR provide critical advantages to our populace. Preventive medicine will allow doctors to get more information on the tracking of conditions. This will provide the benefit to aggressively treat a risk factor and hopefully shortcut the critical issues that cost the most amount of money. If the doctor was tracking the coronary heart disease over a period of time, the doctor and the patient together could plan for a treatment that was gradual and effective, rather than waiting for the heart attack and then starting treatment. From both the cost standpoint and the quality of life standpoint, the patient would be in a better position. EMR, if implemented correctly, will allow doctors to have the wisdom of the crowds to gather information on conditions and how others have successfully treated them, in much closer to real time. Today we wait for articles to appear in medical journals to get our information. We can and must do a better job here. Dr. Varghese, you just don’t get it. The world has changed and the medical community needs to change as well.

So, the former Labor Secretary, Robert Reich writes regarding the health care crisis that the only way that we will get out of this mess is to look to cost containment, or even cost reduction. Those doctors, hospitals, insurance companies, drug companies and their friends will need to reduce the costs of providing their products and services. The best way to do that is through the free market system and a mandate from the government to implement changes in our medical systems. President Obama needs to have a strong hand and force the issue.

Earlier this week I posted about the health care mess and talked about some of the causes. In thinking about this a bit more, I feel the need to expand upon one particular group of participants. Over time I may go over some of the others, but for right now, my ire is with the health insurance industry.

These are presented as separate musings, all related to the same topic.

Insurance is a funny thing. Many people believe that insurance should cover all medical costs. In my world view, this is playing with OPM – Other People’s Money. If the insurance policy will pay for everything, where is my responsibility to evaluate the costs and benefits of my health care needs? I firmly believe in high deductible medical policies — where the insured pays for the regular charges and uses the insurance to cover the risk of a costly medical event. In this way, you can determine if you should go to the emergency room with that sprained ankle or whether it is better to wait to go to an urgent care center where the costs are less. You need to take control of your health care and the best way to do that is through the lens of your wallet.

I read an interesting article from Nate Silver, from fivethirtyeight.com, the statistical blogger who correctly predicted the last presidential race. He talks about a George Will opinion article that describes the President’s wish to include a public insurance option as a folly. Nate (and I) believe that the addition of a public option will provide some competition to the ingrained insurance cabals.

One of George’s thoughts is that the government can undercut the insurance companies because it does not need to make a profit. Nate brought a good point to the discussion – the fact that profits are not earned by providing better service, just by adding additional people to the pool. Therefore, the government can provide serious competition to the insurance companies. Last year, Aetna earned $1.3B in profits, UnitedHealthCare returned $2.977B and CIGNA had a bad year, only $297M in profits down from $1.1B the prior year. We should not cry for these companies; we need to ask how they are going to help us address the health care crisis in our country.

In any case, the logic that the insurance companies use is flawed. For example, let’s say that someone has an insurance policy through an employer. No problem, the insurance company takes a history but, in general, accepts everyone in the group. All is fine until the employee loses his job. Not a big deal, because there is COBRA, which allows the employee to continue coverage, by paying the entire premium. Now, this is only the law for companies that have 20 or more employees, but let’s not pick on details. So, the former employee is now paying the full premium, but is covered under the same terms and conditions as when he was employed. But COBRA runs out 18 months (yes, there are some exceptions and temporary extensions, but bear with me…). At this point, former employee needs to get other insurance. Hopefully he will have gotten a new job that include health insurance benefits. But let’s take the story one more step. He is unable to get a new job. He tries to get an individual policy that will cover his insurance needs. So, he goes back to the company that provided his insurance coverage while he was employed and during his COBRA period. Note that nothing has changed: same company, same person, same health experience, no health changes. The company denies him insurance because of a medical issue. They claim that his risk is too high. But nothing has changed! The risk is the same as when he was employed. The insurance company claims that because the group is now small (1), they have different underwriting standards. Instead of looking at their entire pool of policyholders, they focus on the risks associated with a single participant, which negates all of the reasons for having insurance in the first place.

There are many problems with the insurance system today. George Will elaborated on some of them. OPM even raises its head here because a significant portion of the employee’s insurance premium is paid for by the company with tax deductable dollars. But as Nate Silver so adeptly points out, you can’t just start up a health insurance company anymore. The only entity that has the ability to do so is the Federal Government and I sure would like to see some innovation that might be spurred on by new competition.

The one thing that the general public doesn’t have that all of the other constituencies have is a lobbyist. The doctors and the AMA have one. The insurance companies have one. Big Pharma has one. The hospitals have them. Right now, the President has the responsibility for lobbying for the general public. He has claimed that he wants bipartisan support for health care reform, but it is clear that the only way to get both parties to agree is to have no real change. President Obama needs to use his bully pulpit and put together a program that will work to reform healthcare, despite the opposition party and the lobbyists. This is his opportunity to put his stamp on ensuring the future of the American health care system.

The thing about this health care crisis is that no one is going to come out of this with the status quo. Each constituent is going to have to make a change: it could be to their process, procedures, reimbursement, staffing, equipment, expectations etc. The insurance companies need to take the initiative to strive for new ways of doing business so that they have some say in how it all comes out. Otherwise, they might just be forced by competition from the government and by force of law to react to a very different world view.

Big Picture: And small differences. The Washington Post op-ed today talks about statistical evidence that indicates that we should believe that the election numbers in Iran were fudged. Interesting conclusions.

Business: One of the internet’s success stories has to be Amazon.com. What a lot of people don’t realize is that there is a lot going on at Amazon behind the scenes to ensure that you as a consumer get the right information to buy the right products. And how they make money was an eye opener to me. This is one case where the answer to how can you sell products at a loss can truly be Volume!

Entrepreneurship: On the other side of the coin, Clear has stopped doing business. Joel writes about the lack of a change in business model that helped cause the failure of this company.

I read an interesting article on health care that debunks many of the commonly stated reasons for our health care crisis in this country. It seems that we don’t have more hospital beds, doctors or CT Scanners than the rest of the world. Malpractice insurance and tort reform are a problem, but not a huge problem. Why in the world are we spending 2.4 times the amount of money per capita and 70% more as a percent of GDP than the rest of the world on our health care system?

My quick answer is OPM – Other People’s Money. Just like its homonym, OPM (opium) is a narcotic that can induce people to misuse it.

Lets take a few examples and see where this leads. Insurance companies pay the bulk of the medical bills in this country. In most cases, they negotiate with providers (hospitals, physicians, etc.) to pay from a price list. That is, even though a hospital may charge $1000 for a procedure, the insurance company has negotiated a rate of $600 and will pay that $600 to the hospital. The hospital writes off the $400 negotiated credit. But what happens if you don’t have insurance… You will be billed $1000 and be expected to pay that. The hospital is not taking a loss at $600, but there is no incentive for them to accurately price their services. In fact, they may not even know their true costs to offer services. That to me, as a business and numbers guy, is truly scary.

The patient, in most cases, has insurance. Do most patients shop around for services based on cost? Actually, most people pay more attention to the pricing of their cell phone plan or auto body repair than they do for health care. Why is this? OPM. They know that their insurance company will pay according to the terms of their policy and this gives them the freedom to be blind and dumb when it comes to their healthcare. Do whatever the doctor recommends, no matter the cost. This has the additional unfortunate side effect of people not having the data to accurately determine the competence of their health care provider. If you are not going to check on price, you probably aren’t going to see if the doctor or hospital has significant experience and positive results with your type of condition.

Ah, then, the answer is to get the insurance companies involved. Well, not so fast. The insurance companies by definition, assess and reduce risk. The usual answer is that they do this by combining risk for many people to reduce the harm that an individual’s loss could cause. In auto insurance and home insurance, they do this pretty well. In health insurance, unless you are part of a huge group, say a Fortune 1000 company, insurance companies will weed out anyone who shows even a glimmer of a future problem, either through direct denial or increased rates. Rather than look at their entire portfolio of insureds and combine risks, they focus on the micro level of each individual subscriber. But the only data that they have is based upon doctor records. So, if you know you are sick but haven’t been to a doctor, you are more likely to get insurance coverage than if you have been doing the preventive medicine routine with regular checkups and preemptive care. Totally backwards, but somehow it makes sense to the insurance companies.

Well, then the problem must be solved by the doctors. Again, OPM raises its ugly head. Doctors also buy insurance — in their case it is malpractice insurance. They are scared senseless by the threat of huge lawsuits, so they overtest. Sure don’t want to be that guy who gets asked “Why didn’t you order an MRI to determine for sure the extent of the problem?” on the witness stand. All of this testing costs money and the patients, in general, don’t make a fuss — if the doctor requests it, it must be the right thing. This leads into a long discussion about tort reform, another OPM — insurance companies paying off litigants and their attorneys, but I am not going to go there. The thing about overtesting is that the doctors have wised up. They have seen the amounts of money going to testing, imaging and minor surgical procedures. They too are taking advantage of the OPM gravy train by starting up centers to do imaging, diagnostic testing and minor surgery. They can then take a piece out of the insurance dollars on both sides of the transaction. There is nothing in the AMA charter that disallows this practice. Does it equal more unnecessary tests? You would have to think so.

Solving the health care crisis is not solving a simple problem. It will require many small steps to help to corral the runaway train that is OPM. But nothing is more important to the future of our country than the process of reining in health care costs and improving medical outcomes. We as a country need to step back and say that we didn’t have the optimal solution and look at how other countries have attacked the problem to help us find our right path.